Appreciation of Domestic Currency
- Definition: Appreciation of domestic currency refers to an increase in the value of the country's currency in relation to other currencies in the foreign exchange market.
- Causes: Appreciation can be caused by factors such as an increase in foreign investment, strong economic performance, high interest rates, or political stability.
- Effects:
- Imports become cheaper, leading to lower inflation.
- Consumer purchasing power increases as imported goods become more affordable.
- Exporters may face challenges due to higher prices of domestic goods in foreign markets.
- Example: If the US dollar appreciates against the Euro, it means that one US dollar can buy more Euros than before.

Depreciation of Domestic Currency
- Definition: Depreciation of domestic currency refers to a decrease in the value of the country's currency in relation to other currencies in the foreign exchange market.
- Causes: Depreciation can be caused by factors such as a decrease in foreign investment, economic instability, low interest rates, or political uncertainty.
- Effects:
- Imports become more expensive, leading to higher inflation.
- Consumer purchasing power decreases as imported goods become more costly.
- Exporters benefit as domestic goods become cheaper in foreign markets.
- Example: If the Indian Rupee depreciates against the US Dollar, it means that more Indian Rupees are required to buy one US Dollar than before.
In conclusion, appreciation and depreciation of a domestic currency have significant implications for a country's economy, impacting trade balances, inflation rates, consumer purchasing power, and export competitiveness. It is essential for policymakers to closely monitor and manage currency fluctuations to maintain stability and promote economic growth.